Email correspondence a valid and binding contract, court confirms

by Ian Macleod, CEO of the legal publisher RP Emery and Associates

Email correspondence a valid and binding contract, court confirms

A recent decision by the Supreme Court of Queensland confirmed that email communications can amount to a legal contract, in this case, a contract for the sale of a commercial property known as the Koah Roadhouse.

The Koah Roadhouse is a service station in Far North Queensland owned by North Queensland Fuel (NQF). NQF appointed Colliers International (Cairns) Pty Ltd to sell the freehold and the business.

Representatives of United Fuel Pty Ltd (United) inspected the property, and then began negotiations for its purchase by a series of emails and telephone communications, in which the following was agreed:-

The purchase price of $1.6m for the freehold and the business;

Deposit being $80,000;

Stock at cost value – determined on the day prior or on the day of settlement;

Due diligence including fuel tank and line testing, and environmental investigations to the buyers satisfaction on or before 40 days from the date of the contract, outstanding “financials”;

60 day settlement from contract date;

Place of settlement to be Cairns;

The form of the written contract as per REIQ standard form (attached directors’ guarantees were later removed by the purchaser’s solicitor when completing the contract).

The representative of United, Mr. Hurry, sent an email to the following effect:-

“Jay, further to our various discussions, I can confirm our offer of $1,600,000 for the business and freehold of the above property… This offer is of course subject to contract and due diligence as previously discussed. We are hopeful of effecting an exchange of contracts next Monday but need acceptance of our offer immediately so we are in a position to instruct the appropriate consultants to carry out the necessary investigations.

I look forward receiving your client’s confirmation that our offer is accepted as clearly both parties are now going to start incurring significant expenses”. (Emphasis added)

This was responded to within 45 minutes by an authorised representative of NQF:-

“We accept the below offer which we understand will be subject to execution of the Contract provided (with agreed amendments) on Monday, minimal due diligence period and the provision of all information/reports etc. that are obtained by the purchaser during the due diligence period.” (Emphasis added)

A few days later, the solicitor for United submitted the Contract with completed purchaser’s details and due diligence special conditions added, but with the original provision for directors’ guarantees removed.

In an email response, the authorised representative of NQF, stated that the contract was not accepted by the seller due to the change in / addition of conditions to what was originally proposed and the deletion of the director’s guarantee and that ‘as a result of the changes the seller did not feel comfortable with how the rest of the due diligence would have proceeded if the above ‘start’ was indicative of the future dealings.’ Further, the email stated that NQF had since entered into another contract for the sale of the Koah Roadhouse.

United claimed that a contract for the sale of the roadhouse was constituted by the email exchange and particularly, the acceptance email of 31 October, 2014, together with certain phone conversations.

NQF argued that there was no contract on the basis that:-

The offer was not unconditional and capable of unqualified acceptance because it was “subject to contract”; and

The acceptance was not unqualified;

The parties did not reach agreement as to material incidents, namely, whether the directors guarantees would be required;

It did not intend to be legally bound; and

There is no sufficient written memorandum or note to satisfy s 59 of the Property Law Act 1974 that the contract for the sale of land should be in writing.

Impact of the words “subject to contract”

The Court considered the effect of the words “subject to contract” and whether the offer and acceptance were unconditional. It cited McHugh JA in GR Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd:

“Even when a document recording the terms of the parties’ agreement specifically refers to the execution of a formal contract, the parties may be immediately bound. Upon the proper construction of the document, it may sufficiently appear that the parties were content to be bound immediately and exclusively by the terms which they had agreed upon whilst expecting to make a further contract in substitution for the first contract, containing, by consent, additional terms: Sinclair, Scott & Co Ltd v Naughton”

The court concluded that the context of the two emails and the expressions used in them, strongly suggested that the parties were content to be bound, whilst expecting to make a subsequent formal contract in substitution for the first contract, with additional terms contained by consent.

The Court found the words used by United so as to effect the acceptance to be clear from the closing words of the email: “I look forward to receiving your client’s confirmation that our offer is accepted as clearly both parties are now going to start incurring significant expenses”. (Emphasis added)

Did the Seller manifest an intention to be bound?

The court held that it was the “objective” intention of NQF that was of relevance, as opposed to any uncommunicated subjective reservation or secret intention that NQF may have harboured.

It came to light that NQF had also been dealing with another potential purchaser, with the likely aim of securing the highest price by playing each interested party against the other. In this light, it is likely that NQF would not have “subjectively” intended to be bound by its acceptance of United’s offer. However, the court reiterated that it is an objective assessment of NQF’s intention which is relevant, particularly, what a reasonable person would have understood in the circumstances:

“It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relationships. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement”. (Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd).

The Court concluded that based on the information the parties expressed a desire to have their agreement formalised by the standard REIQ contract.

Were the material matters of the contract agreed to?

The Court found that the material matters had been agreed to, in this case, the following:-

What was sold;

The purchase price;

The deposit;

When stock was to be valued;

When testing of tanks and lines would occur;

The due diligence period;

When settlement would take place; and

Location of settlement.

There was no agreement between the parties as to whether personal guarantees would be given. However, the court concluded that this did not affect the existence of the contract, because there was no evidence to suggest that the personal guarantees were a matter essential to the entry into the contract (if anything, they would be regarded as a condition subsequent).

Were the communications in writing and signed for the purposes of the Property Law Act?

Section 59 of the Property Law Act requires contracts for the sale of land (or a memorandum or note of the contract) to be in writing and signed by the party or the party’s lawfully authorised representative intending to be bound.

The court found that this requirement was satisfied by virtue of the Electronic Transactions (Queensland) Act, 2001. Section 14 states that where a person’s signature is required by law, the requirement may be met by an electronic communication if certain criteria are satisfied. One requirement of s14, is that a method must be used to identify the party. However, although the acceptance email did not identify any person as the acceptor of the earlier offer, the court found that this was not fatal, and that the identity of the person could be easily established with regard to further evidence.

Key points to take away

Those in the business of negotiating on behalf of others, such as real estate agents, solicitors and conveyancers, must exercise caution. The words “subject to contract” within the offer and acceptance process, do not necessarily avoid the existence of a contract if all of the material matters of the transaction have been established and agreed to and the parties manifested the objective intention to be bound.

This case also demonstrates how easily email transactions can fall within the scope of the state based electronic communications legislation, in this case, to satisfy signature requirements for land transactions.